Fund House DSP BlackRock Investment Managers Pvt Ltd recently decided to temporarily stop fresh inflows into its DSP BlackRock Micro Cap Fund, which is focused on investing on small and mid-cap companies. In an e-mail interview, Vinit Sambre, s enior vice president and fund manager, DSP BlackRock says liquidity challenges and soaring valuations are the key factors which led to the decision. Edited excerpts:
Why did you decide to stop fresh inflows into DSP BlackRock Micro Cap Fund?
Over the course of the last few years, DSP BlackRock Micro Cap Fund has grown to become one of the largest funds in its category. While we continue to find interesting investment opportunities for the fund to invest in, its current size posed the bigger challenge of liquidity. Due to the fund size, it is increasingly difficult to incrementally build positions, i.e. to increase stock weightage of companies to a meaningful size in the portfolio.
Building 2-3% position of this fund into any company in the micro-cap category requires us to buy a decent size of the company capital and given the liquidity scenario it is not easy to do the same. In the process we end up owning less than desired holding of the company capital, which we believe could potentially impact our future performance. Due to these challenges we decided to stop fresh flows into this scheme in the interest of investors.
What has been the reaction of the investors?
We are reaching out to our investors across different channels regarding our decision. Investors seem to be curious to know if we have turned cautious on the micro-cap category. I would like to allay these fears and stick to our positive long-term view. Investors who have long term horizon of 3-5 yrs should not be worried. In the near term volatility is not ruled out given the global geo-political issues and slower than expected earnings momentum locally.
What happens to existing investors and those who invested in SIP?
While the scheme has temporarily stopped accepting fresh applications (both lumpsum and SIPs), after 17th February, it will continue to accept inflows from existing SIPs. If one has a SIP in the scheme, their bank account will continue to get debited on the SIP date for the same amount.
What is your advise for the investors?
We are explaining to our investors that stopping flows doesn’t signal anything untoward in our portfolio mix. We continue to actively manage the portfolio, our core investment philosophy has not changed and we continue to hold positive view on our investee companies. Hence long-term investors in our fund need not be worried. However, some investors who would like to book profits to meet their asset allocation or liquidity requirement may do so. We are not giving any negative signal for our portfolio or the scheme.
Small and mid-cap stocks have run into high valuations. Was this a factor in your decision?
That factor has played a role in our decision. Rising market levels leads to increase in valuation of companies especially the small and mid-space where the rise has been much more. In some way, this is restricting our ability to find many opportunities at reasonable valuations, given the size of the fund. Lot of money chasing fewer ideas makes it difficult to build adequate position of a company. Hence we took a call to stop fresh inflows into the scheme. We tried to defer this move as much as we could, but when we felt it is becoming quite challenging, we took this decision.
What is your outlook in the small and mid-cap space? Do you think there will be a correction?
We continue to like the small and mid-cap space with a long-term view of 3-5 years horizon. We still believe that small and mid-cap space remains the best way of creating wealth in the long-term by participating in the growth of these companies. However, we do not rule out volatility in the market in the near term given the phenomenal rise of the category in the last two years and near term issues like UP election, GST implementation, demonetization led slowing earnings growth, among others. It is also possible that small and mid-caps may under-perform in the near term.
